The invisible hand has had a rough time of it. At times, it is invoked as a symbol of cold-hearted capitalism; at others, as shorthand for the miraculous interaction of supply and demand. Rarely, however, is it understood for what it actually represents: the reconciliation of individual interests through markets.

Adam Smith (1723-1790), the founding father of modern economics and the originator of the term in its economic sense, was above all concerned with how people live together. This is already evident in his first major work, The Theory of Moral Sentiments (1759). There, the invisible hand appears as a description of a human tendency toward balance and prosperity that occurs without deliberate intent by people, in this case the wealthy.

In a second passage in Adam Smith’s book – there are only three in total – the reference to the invisible hand also suggests that it is possible to understand complex relationships rather than to invoke anything mystical. In his posthumously published lecture on the History of Astronomy, Smith argues against polytheistic explanations of natural phenomena. Regular occurrences in nature, he writes, should not be attributed to the arbitrary will of a deity but to observable properties: “Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter every apprehended to be employed in those matters.”

No intention – yet it happens

The lesson is clear: many processes appear to be guided by an invisible hand, yet on closer inspection they are perfectly explicable. This insight also lies at the heart of the third—and best-known—reference to the invisible hand in Smith’s The Wealth of Nations (1776). The invisible hand becomes relevant when it comes to domestic value creation – and the fact that this increases through the gainful employment of individuals without anyone giving it much thought: “By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

It was not the intention, but it happened anyway. Only upon closer inspection is it possible to explain how – it is the interaction in markets; it is the division of labor that brings people prosperity. That remains true today.

Another passage from Smith’s principal work, probably the most famous, makes the point clear: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” What, exactly, is Smith describing here? Is someone being taken advantage of here? Is the butcher cutting a deal? Or are customers and bakers locked in prolonged negotiations over what—after much deliberation—might constitute a universally fair price?

Neither! When I walk into a bakery, the bell rings and I order a few rolls and a couple of pretzels, we arrive at an exchange that has been tested over time and coordinated through prices. The mechanism becomes even clearer at a flea market or when buying a used car. Markets bring buyers and sellers together; they create an alignment of interests. Not every offer finds a taker, but that is the core idea of markets: to achieve as many agreements as possible to mutual benefit. Of course, I need to be an attractive trading party. That means offering good products, at competitive prices, and ideally with some degree of innovation.

This is not selfishness – despite the accusation often leveled at Smith. Critics like to portray his butcher, brewer, and baker as greedy, self-absorbed figures, indifferent to others. Homo economicus is soon invoked – even though it arrived much later in economic theory – reinforcing the image of the cold, calculating capitalist. But Smith’s butcher, brewer, and baker are about something else. We expect, Smith says, “that they look after their own interests.” And he continues: “We address ourselves, not to their humanity but to their self-love, and never talk to them of our own needs but of their advantages.” Bring your own interests to the table! Use your judgement! Do not wait for acts of charity. This is what Smith urges everyone to do. It is a call for self-love and mutual advantage. Economic reasoning, he argues, is fundamentally human-centered. Not driven by altruism, perhaps, but by a shared willingness to recognize the interests of others.

Competition as a task

Smith was a philosopher of the Scottish Enlightenment – and an optimist. Perhaps 
a little too optimistic. The rapid material rise brought about by industrialization and the numerous innovations that soon reached the continent came with its darker sides: Companies strive for positions of power, and economic success is not always the product of effort alone but often of luck – a point repeatedly emphasized by the Austrian economist and social philosopher Friedrich August von Hayek.

The implication is clear: competition, the game of the market, needs rules. Only then can it be fair. Smith had that in mind, too, when he describes the entrepreneur in The Theory of Moral Sentiments as follows: “In the race for wealth, for honours, and preferments, he may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of.”

This logic underpins the social market economy. Rules are needed to make the game possible at all. Markets and competition are not natural forces but cultural phenomena that require active stewardship. For competition to serve the interests of all, it must be understood as a task of both the state and society. Rules are not meant to steer the game but to create the space in which it can unfold. Many debates about cutting red tape would benefit from keeping this distinction in mind: rules are most valuable when they create freedom rather than stifle creativity.

Social infrastructure as a hidden champion

Markets, then, serve the common good—just as Smith envisioned—when individuals are willing to recognize the legitimacy of others’ interests. In short, when all sides are willing to compromise: I may not achieve the highest possible price, nor strike a bargain every time – but a meeting of interests takes place. Both sides are willing to accept the opposing position. Both sides move toward each other, extending a hand. The willingness to compromise expands the scope for action and exchange.

The essential precondition for such compromise is mutual trust—bringing us to the social market economy. For Alfred Müller-Armack, who coined the term, it was always an irenic concept, derived from the Greek word for peace. He firmly believed that reconciling conflicting socio-economic interests and divergent political visions was a prerequisite for the material, political, and moral reconstruction after the Second World War. His goal was not to erase differences, but to bring opposing positions together in a moderate way.

For many years, this irenic formula proved successful. Today, it may be more important than ever. In a study of more than 170 countries that we recently completed in partnership with the Roman Herzog Institute, we can show that there is an interplay – or, technically speaking, a strong positive correlation – between economic development and social cohesion. The two must be considered together. The findings suggest that the interaction between inclusive institutions must first prove successful before there can be any visible effects on economic performance. By international standards, Germany performs relatively well.

The policy implications are clear. We should not squander our high level of social cohesion. Institutions must be strengthened, democratic processes safeguarded, and social participation and trust actively promoted. We urgently need investment not only in our physical infrastructure – bridges, rail, and roads – but also in social infrastructure. A handshake with the invisible hand succeeds only if we stop dismissing social cohesion as sentimental idealism and recognize it for what it truly is: a hard economic factor – and a hidden champion.

Prof. Dr. Nils Goldschmidt is Director of the Weltethos Institute at the University of Tübingen and Professor of Contextual Economics and Economic Education at the University of Siegen. Since October 2024, he has been a member of the German Ethics Council.